One of the most common questions I get from consumers is whether or not paying off or settling old debts will have a positive impact on their credit report cards and credit scores. Normally, the question involves charged-off credit card accounts, leftover balances on car loans after a repossession, unpaid collection accounts, tax liens and defaulted student loans.

Each of these debts can be cleared once they’ve reached delinquency status, which occurs once a certain number of payments have been missed. Delinquent debts can be paid in full or you can attempt to negotiate a settlement with your creditors to pay less than what’s owed. Whether or not you’ll see a change to your credit score right away depends on a few different factors.

We looked at data from Credit Sesame members who had delinquent or collection accounts, and what their average credit scores looked like. We also examined members who did not have any accounts in collections and found that the average credit score difference was significant. Chances are, if you’re facing collections or delinquent accounts, your credit score has dropped and you need to improve it.

The average credit score for Credit Sesame members who have at least one collections account is 570.

The average credit score for Credit Sesame members who have at least one delinquent account is 551.

The average credit score for Credit Sesame members who do not have any delinquent or collection accounts is 621.

Reporting delinquent debts

Just paying off a delinquent debt isn’t likely to affect your credit history in the short term. Once a debt has been paid or settled, the next step is making sure that the payoff is reflected on your credit report.

In a perfect credit reporting world, the account would be updated within 30 days to show that the balance has been zeroed out. However, you shouldn’t assume that a creditor or collection agency will do so automatically. The result is that it may be necessary for you to dispute the account with the credit reporting bureaus to make sure it’s updated properly.

When you initiate a dispute, the reporting bureau is obligated to investigate and resolve your claim but the process can take a few weeks. If you can provide documentation showing that the debt has been paid that can help to speed things up.

How paying off old debts affects your score

Once your account information has been updated on your credit report, your credit score should improve, right? In reality, the answer’s not quite that simple.

While the FICO scoring models are the most popular credit scoring model lenders use, your FICO score isn’t the only credit score you have. There’s also the VantageScore, developed by Equifax, Experian and TransUnion. Older versions of both FICO and VantageScore focused more on the fact that a consumer had a delinquent account, versus how much was owed. Paying off an old debt wouldn’t necessarily do much to soften the blow of the negative mark caused by the delinquency.

Do you know what credit category you’re in? Check your score for free on Credit Sesame and find out!

In the newest versions of the FICO and VantageScore credit scores, however, paying or settling your delinquent debts, specifically those that have been sent to collections, can result in a higher credit score. Both FICO 9 and VantageScore 3.0 exclude collection accounts from score calculations once they’ve been paid off.

Even if an account hasn’t gone to collections yet, knowing how to pay off collections and actually paying it off or settling has the potential to help your score in another way. (See how this Credit Sesame member removed 12 collections accounts on his own and raised his credit score by 169 points!)

It would also help to understand how to remove collections from credit report, though most commonly it is just a matter of payments and time. Clearing a debt can impact your credit utilization ratio, which is the amount of credit you’re using versus your total credit limit. Ideally, you should be aiming for a utilization ratio of 30% or less.

Prioritizing delinquent debts

If you have multiple delinquent debts, you may be wondering whether paying them off in any particular order will affect your score. In terms of credit reporting, negative items can remain on your report for seven years from the date of the original delinquency. That includes things like late payments, charge-offs and collections.

While the immediate impact of negative items is evidenced by a significant drop in your credit score, they begin to carry less weigh as time goes on. If you have a mix of old and new collection accounts, paying off the ones that occurred most recently is going to be more beneficial to your score.

Once a delinquent debt has passed the seven-year mark, you’ll need to tread carefully when paying it off. At this point, it should fall off your credit report completely but any new activity, including a partial payment, can reactivate the account. If you’re going to tackle a debt that’s aged off your report, be aware that you might create a new account history if you’re not paying in full. In some states, making a partial payment also resets the clock on the statute of limitations (how long the creditor has to sue you for the debt).

Another detail that might be important to you is that medical collection accounts are treated differently than non-medical collection accounts in the newest scoring models. They hurt less. If all else is equal, paying off a non-medical collection account before a medical collection account should result in a greater boost to your score.

Settling vs. paying in full

Considering how FICO and VantageScore’s newest models view paid collection accounts, the goal if you have delinquent debts is to get your balances down to zero. Paying the debts in full is one option but settling those accounts is going to yield the same result with regard to your credit score and potentially save you a ton of money in the process.

When you settle a debt, you’re effectively asking the creditor or collection agency to accept less than the full balance owed to consider the account repaid. Depending on who the creditor is and how long the account has been outstanding, it may be possible to settle for hundreds or even thousands of dollars less than what you owe.

Once the account has a zero balance, it won’t drag down your score anymore. A word of caution about debt settlement, however. Canceled debts generally have to be reported on your taxes as income unless you qualify for an exception or exclusion. If you’re settling large amounts of debt, that could come back to haunt you at tax time.

So how will my score change?

If you’re able to pay or settle a delinquent collection account and you apply for a loan or credit card with a lender that’s using a newer credit scoring system, it’s possible that your scores are going to be higher than if the collection still had a balance. Keep in mind, however, that your score may not change at all, especially if you’ve got other negative information on your credit report.

In terms of how much you could see your score climb, it could be as little as a few points or as much as several dozen points. If you’ve recently paid off a delinquent debt or you’re planning to in the near future, you can check your free credit score right here at Credit Sesame to see whether you’ve gained any points. We use the VantageScore 3.0 model, which is one of the scoring systems that ignores zero dollar collections.

Paying off other delinquent debts

Obviously, collection accounts don’t represent the entire universe of possible delinquent debts. You can be behind on your mortgage, credit cards, student loans and or car loans without any of them being in collection status. Paying past due debts to a zero balance isn’t going to cause FICO and VantageScore to ignore them so you’re less likely to see a significant improvement in your scores as a result. You may earn a few points because scoring systems do consider balances on delinquent accounts, but the fact that you were late in paying in the first place won’t be erased.

Once you’ve gotten caught up on past due accounts and paid off delinquent debts, your focus should be on maintaining the health of your credit score. Paying all of your bills on time, keeping your balances low and limiting how often you apply for new credit are the most important things you can do to keep your score on track.

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Published August 6, 2015 •
Updated: April 27, 2017

John Ulzheimer, Credit Expert for Credit Sesame, is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice FCRA certified by the credit industry’s trade association and has been an expert witness in over 170 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit.

Comments(18)

In some cases, it may affect my credit score. Delinquent debt will be off the credit report after 7 years. I paid off the loan after years of them chasing me. When the debt was paid off the record actually came back to my credit report and lowered my credit score. Not sure there were other factors. However, that is very frustrating.

I have recently paid off delinquent accounts on my credit report, but I have not seen a change in my score. I paid off 5 accounts, 2 of them which have been closed, and three that have reported that they were paid. How long until I see an increase in my score?

Because of medical reasons, my wifes account was charged off in 2012. We recently reached out to the bank and made an offer to settle the debt. The bank said it will be reported on her credit report as "Settled" and not "paid in full". Ultimatley how it will the notiation of "settled" vs "paid in full" affect her credit score? Will this remain on her credit from 7 years after the settlement or 7 years after the charge off in 2012?

I took a second job and every check I get I pay towards a credit card balance till it reaches zero, throw the card in the safe and move onto the next one. I started with a 530 I'm now at 580. I can't get above that. My frustration is Synchrony Bank whom I have 4 accounts with, has closed my PayPal Extras MasterCard Account which had a 500 balance, 2 months after I paid it in full. Walmart which had same limit they reduced it to 100.00 limit. This I know has hurt my score. There reason was a soft pull that reflects collections accounts. All of which are medical. Too many inquires which I just traded in my Accord 2 months ago for a new one. Same finance company, and switched cell carriers. How can I combat this? I have 2 left with this bank Victoria Secrets and Care Credit. I have never missed a payment, never been late. As a consumer I'm frustrated trying to do the right thing. From watching my score it appears when they close an account it affects the use rate. I thought if I switched gears and paid off collections accounts the remaining card companies could not use this as reason to close my account once the account is paid in full. I personally think laws should be put in place where if a company closes your account or reduces your limit it doesn't affect your score much like the more recent laws where consumers can shop for a car or home mortgage for 30 days and it's only one hit to your credit score
Any advice? I've decided to leave the last 2 accounts with this bank to the very end in paying them off since they keep closing them, pay off the others, then start on collection accounts. I will never do business with company again on any level.

How long does it take to build your credit up over 650 if its below 550? I have been working on this due to the fact that my husband and I have paid cash, or live in a family home given to us. But now I am wanting to get my credit up so that I can buy a home. (ours has mold)

Melissa, In some cases you can see a credit score increase after just one month. If you have bad credit because of a lack of credit history - you typically pay cash - then you could see a credit score increase as soon as you open a credit card account. Just don't charge more than about 10% of the credit limit. Having low utilization will help your score. Then after a few on-time payments, you'll continue to see an improvement in your score.

I have paid off all my collections, but they still linger on my report. I know my score will go up if u can get those derogatory remarks off my report. I have signed up with Lexington law firm and still haven't gotten results. What do I do??????

For me a collections account with a balance was on my report.. passed the 7 year mark and was removed but had 0 impact on my score. I was able to remove 2 other collection accounts that were there for 5-6 years. my score went up about 5 points. yipee! :P . So the effect of a delinquent account on your score depends on how much time has passed.
Also I know you can pay down collection accounts and it will NEVER reset the clock as to how long it can be reported on your credit report. The clock starts when the original creditor reports your account delinquent period. Paying a delinquent account will NOT change that date.
Also the only way to see the date of first delinquency or the date the negative mark is to come off is on a requested credit report you get in the mail. It has much more information on it than is shown you by any of the CR agencies online. what a scam they have going.

Q: If I joined a club and signed a contract with them. Months later I could not make the monthly payments and now it’s in collection but it’s not reported on my credit report. It’s well over 6 years since I made a payment. Am I still obligated to pay the collection agency even though there was no merchandise involved, just club fees.

Meme,
You are legally responsible to pay your debts. However, the creditor can only pursue you for it until the statute of limitations expires in the state where you live. If it does show up on your credit report, it should be removed 7 years after the date of delinquency, which is generally about six months after you miss your first payment. If you see it on your credit report more than 7 1/2 years after your last payment due date, you can dispute the item with the credit bureau reporting it.
Kim

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